New rules in 2010
More than 60,000 cardholders have complained to the Federal Reserve about such penalties. New protections are scheduled to take effect in July 2010 that will limit what some consumer advocates deem “abusive” practices, such as credit card issuers suddenly raising rates, cutting credit lines without reason and imposing new maintenance fees. Under the new rules, for instance, interest rate hikes will require a 45-day advance notice, and rates cannot be raised on existing balances unless a payment is more than 30 days late.
Credit card companies deny that penalties on traditionally good customers, which began last year but have gone into full swing since October, are connected to the new federal regulations. “It’s a response to the increased cost of doing business in a weaker economy,” says AmEx spokeswoman Mona Hamouly. “It’s not related to any legislation.”
Chase spokeswoman Stephanie Jacobson, who declined to be interviewed or answer specific questions via e-mail, said in a written statement: “When necessary, we make changes to pricing, terms or credit lines based on borrower risk, market conditions, and the costs to us of making loans. We recognize that some of these decisions can have an impact on some customers, and we make these decisions with great care.”
What should you do?
You have choices to make, especially if you have always been a reliable credit cardholder.
* Curtail but don’t cancel. Your first reaction to recent penalties may be to close your account and take your business elsewhere. “But that could backfire and hurt your credit score—at least in the short term,” says Careen Foster, spokeswoman for FICO, a company that computes credit scores. “Opening new accounts is a sign of increased credit risk, especially in today’s economy.” And closing existing accounts, especially long-held ones, reduces your credit worthiness by increasing your debt-to-available-credit ratio. It’s better to use existing cards periodically, and forget about generating rewards, which are harder to redeem these days anyway.
* Keep balances below one-third of your limit. Just because you have a high credit limit doesn’t mean you should use it, notes Mierzwinski. “It’s no longer enough to just pay on time; your balance shouldn’t exceed one-half your credit limit, and, ideally, it should consistently be one-third or less of that.”
* Don’t consolidate. Another temptation may be to move all your existing balances to a low-rate “teaser” card. But that account can quickly max out, hurting your credit score. Your credit score will fare better if you instead pay down existing cards. If you’re making partial payments, pay off the card with the highest interest rate first while making the minimum payments on the others. That way, you minimize the amount of money you’re paying in interest.
* Complain … nicely. Credit card issuers are less likely than in the past to remove already issued restrictions, but they still do—especially for customers with a sterling past who go up the chain of command. When Citibank suddenly issued a double-digit interest rate hike on Mierzwinski, he complained to a supervisor that he always pays his balance in full and well before the due date, and was issued an interest rate lower than his previous one.
Sid Kirchheimer covers consumer and health issues for the AARP Bulletin.